Technical Analysis

Bet on small moves

KS Badri Narayan | Updated on March 16, 2014 Published on March 16, 2014


L&T Finance Holdings (₹74.3): The stock of L&T Finance Holdings fell 19 per cent in the last two trading days, after the promoter diluted its stake in the company.

Despite the steep fall, the long as well as immediate-term outlook remain positive. In the short term, the stock finds resistance at ₹81.5 and support at ₹72.

A close below ₹65 will turn the short-term outlook negative. However, the the long-term outlook will remain positive as long as L&T Finance Holdings trades above ₹55. A close above ₹82 will trigger a fresh rally in the stock, which can take it higher.

F&O pointers: L&T Finance Holdings saw a huge build-up in short positions on Friday. It added over one crore shares on the short side. Options trading also indicate a negative bias as puts saw heavy accumulation of open interest positions.

Strategy: Despite derivatives trading signalling a negative bias, traders can consider a bull put spread, as we see only a limited downside in the stock.

The bull put spread option trading strategy is deployed when one expects the price of the underlying asset to go up marginally in the near future.

Bull put spread strategy can be constructed by selling a higher in-the-money put option and buying a lower out-of-the-money put option with the same expiration date.

Here, it can be employed by selling ₹75 put and simultaneously buying the ₹67.5 put, which closed at a premium of ₹3.75 and ₹0.7 respectively.

If the stock price closes above the higher strike price on expiry date, both options expire worthless and the bull put spread option strategy earns the maximum profit of about ₹12,000, which is the premium collected (lot size is 4,000 shares).

Conversely, if the L&T Finance Holdings price drops below the lower strike price (₹67.5) on expiry date, then the strategy incurs a maximum loss which is equal to the difference between the strike prices of the two puts, minus the premium collected, which works out to ₹8,000.

We advise traders to hold the strategy till expiry.

Published on March 16, 2014
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